Amortization calculator - Wikipedia, the free encyclopedia http://en.wikipedia.

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Amortization calculator
From Wikipedia, the free encyclopedia

An amortization calculator is used to determine the periodic payment amount due on a loan (typically a
mortgage), based on the amortization process.

The amortization repayment model factors varying amounts of both interest and principal into every installment,
though the total amount of each payment is the same.

An amortization calculator can also reveal the exact dollar amount that goes towards interest and the exact
dollar amount that goes towards principal out of each individual payment. The amortization schedule is a table
delineating these figures across the duration of the loan in chronological order.

Contents
1 The Formula
2 Derivation of the formula
3 Calculating when compounding period is different from payment period
4 Other uses
5 External links

The Formula
The calculation used to arrive at the periodic payment amount assumes that the first payment is not due on the
first day of the loan, but rather one full payment period into the loan.

While normally used to solve for A, it can be used to solve for any single variable in the equation provided that
all other variables are known.

The formula is:

Where:

A = periodic payment amount

P = amount of principal (be sure to subtract any down-payments first!)

i = periodic interest rate

n = total number of payments (for a 30-year loan with monthly payments, n = 30 years x 12 months = 360)

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Amortization calculator - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Amortization_calculator

Note that the interest rate is commonly referred to as an annual percent (e.g. 8% APR), but in the above formula,
since the payments are monthly, the rate i must be in terms of a monthly percent. Converting an annual
percentage rate to monthly rate is not as simple as dividing by 12, see the formula and discussion in APR.
However if the rate is stated in terms of "APR" and not "annual interest rate", then dividing by 12 is an
appropriate means of determining the monthly interest rate.

Derivation of the formula

The formula for the periodic payment amount A is derived as follows. For an amortization schedule, we can
define a function p(t) that represents the principal amount remaining at time t. We can then derive a formula for
this function given an unknown payment amount A and r = 1 + i.

We can generalize this to

Applying the substitution (see geometric progressions)

We end up with

For n payment periods, we expect the principal amount will be completely paid off at the last payment period, or

Solving for A, we get

Calculating when compounding period is different from payment

period

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Amortization calculator - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Amortization_calculator

When the compounding period is the same as the payment period (e.g., when interest is compounded monthly
and payments are also monthly), then can simply be calculated by taking the annual interest rate ( ) and
dividing it by the number of payments per year. In some situations, however, the compounding period and the
payment period are not the same, as in the case where payments are made biweekly or weekly but interest is
compounded monthly. In Canada, this situation is quite common for mortgages, because interest compounds
semi-annually while payments are usually monthly or biweekly. In these cases, has to be calculated using the
following formula:

where "c" is the number of compounding periods per year and "p" is the number of payments made per year.
The purpose of this formula is to calculate what the interest rate would have to be at each payment point in order
to get the same effective annual rate for compounding at the compounding frequency. You will notice that if "c"
and "p" are the same, then the formula simplifies to being equal to divided by the number of payments
per year.

Other uses
While often used for mortgage-related purposes, an amortization calculator can also be used to analyze other
debt, including short-term loans, student loans and credit cards.

External links
Loan calculator (http://calculator-loan.info/) with amortization schedule.
Amortization Schedule Calculator (http://www.amortization-calc.com/)
MTG Professor Amortization Schedule Calculator
(http://www.mtgprofessor.com/mpcalculators/AmortizationSchedWithTaxSavings/TaxSavings.asp)
Amortization Calculator (http://www.mortgagesum.com/mortgagecalculator/amortization-calculator.php)
Calculator which calculates i given P & A (http://sporkforge.com:424/finance/amortization.php)
Home mortgage amortization calculator (http://www.azcalc.com)
Flexible Amortization Calculator (http://ray.met.fsu.edu/~bret/amortize.html) with schedule

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Basic financial concepts | Real estate

This page was last modified 13:40, 20 December 2007.

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